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Old 10-06-2013, 01:29 PM   #21
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Let's use the 100% Historically Safe Withdraw Rate (HSWR) to make this clearer (3.59% for 30 years). So stated another way, that 3.59% assures 100% historical safety even if you retire at the historically worst market valuations. If you retire at any other, more moderate starting points, you could increase your WR - this should be obvious. Back to 85% success rates, that is why person B can increase to 5% - he is down from a peak, and therefore his valuation is not the same as A's. If A can take $40K from a down portfolio, B can as well.

Of course, this is all relative. If the future is worse than history's worst, all plans will be effected one way or the other.

Later, I'll see if I can model this in FIRECalc by delaying spending by several years. But it's a nice fall day, I should get outside.

-ERD50
Everyone likes to use the Great Depression as an example of the 3.59%/4% SWR survivability - but don't forget that if WWII hadn't happened, I'm not so sure the US would have had as tremendous of a surge in corporate earnings and equity valuations to help kickstart the portfolio after the Great Depression slashing.

Also, as some have commented on in previous threads, PE expansion has grown over time. If the market increases not only because of earnings growth but also because investors go from demanding an average of 5x or 10x earnings to accepting 15x or 18x earnings, that is a one-time growth factor due to PE expansion that will not be repeated. You have to keep that in mind when looking at historical performances, and current valuations, and realize that, truly, "this time may be different" to some degree.
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Old 10-06-2013, 01:49 PM   #22
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Everyone likes to use the Great Depression as an example of the 3.59%/4% SWR survivability - but don't forget that if WWII hadn't happened, I'm not so sure the US would have had as tremendous of a surge in corporate earnings and equity valuations to help kickstart the portfolio after the Great Depression slashing.
If you look at the purple line on my chart which shows the move from the 1938 lows, you will not see that WWII didn't exactly bring good times. After the battle of Midway, the market started to recover. It was no sure thing. Chart is here: Update: equity recovery from SP500 lows

I do not think war is good for stocks or bonds. And it all depends on if you are a winner. Look at the British after WWII, a tough win.
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Old 10-06-2013, 02:42 PM   #23
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Everyone likes to use the Great Depression as an example of the 3.59%/4% SWR survivability - but don't forget that if WWII hadn't happened, I'm not so sure the US would have had as tremendous of a surge in corporate earnings and equity valuations to help kickstart the portfolio after the Great Depression slashing.

....

You have to keep that in mind when looking at historical performances, and current valuations, and realize that, truly, "this time may be different" to some degree.
Let me clarify. I am not, in any way, shape or form, talking about the future. I have no knowledge of the future, and I'm kinda fuzzy on the past .

What I am trying to point out is that the 'paradox' of the two retirees in 1973/1975 can be explained. It isn't a failing of the historical SWR methodology, it's just a simplification to avoid delving into a discussion of market valuations. But it's not so hard to reconcile.

I think I can best demonstrate it with the spreadsheet outputs from FIRECalc, but that will take a bit of work to make sure I've got the inputs and end-of-year statements lined up. Maybe later tonight.

-ERD50
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Old 10-06-2013, 08:07 PM   #24
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Also, as some have commented on in previous threads, PE expansion has grown over time. If the market increases not only because of earnings growth but also because investors go from demanding an average of 5x or 10x earnings to accepting 15x or 18x earnings, that is a one-time growth factor due to PE expansion that will not be repeated. You have to keep that in mind when looking at historical performances, and current valuations, and realize that, truly, "this time may be different" to some degree.
I agree with this analysis. The current Shiller PE10 is 24.17.This reading has only been exceeded 3x before- the top in 1929, the top in 1999, and the mini-top in 2007. And of course in the run-up mania that proceeded each of the first two tops.

Shiller PE Ratio

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Old 10-06-2013, 08:42 PM   #25
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I agree with this analysis. The current Shiller PE10 is 24.17.This reading has only been exceeded 3x before- the top in 1929, the top in 1999, and the mini-top in 2007. And of course in the run-up mania that proceeded each of the first two tops.

Shiller PE Ratio

Ha
I would not argue for a good market due just to PE expansion and respect that we are "up there". So I kind of agree with MooreBonds and Ha. However, I use PE10 in my own methodology but here is the data point for now: we are at the 87th percentile of PE10 since 1920. By that I mean that 13% of the time PE10 has been above this level. Probably this is biased towards recent decades i.e. in recent decades PE10 has been elevated.

PE10 is backward looking and if it is an indicator, it is a long run one that does not correlate with next year's results but maybe further out like 10 year results. If it did correlate with intermediate results everyone would be solely using it. Let's face it, everyone knows about PE10.

If people think this is incorrect let's see the data. I am very willing to learn about new thinking. I think using valuation as the only indicator of market loftiness is not good enough. This is not just my viewpoint.

I rest my case your honor.
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Old 10-06-2013, 09:08 PM   #26
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I would not argue for a good market due just to PE expansion and respect that we are "up there". So I kind of agree with MooreBonds and Ha. However, I use PE10 in my own methodology but here is the data point for now: we are at the 87th percentile of PE10 since 1920. By that I mean that 13% of the time PE10 has been above this level. Probably this is biased towards recent decades i.e. in recent decades PE10 has been elevated.

PE10 is backward looking and if it is an indicator, it is a long run one that does not correlate with next year's results but maybe further out like 10 year results. If it did correlate with intermediate results everyone would be solely using it. Let's face it, everyone knows about PE10.

If people think this is incorrect let's see the data. I am very willing to learn about new thinking. I think using valuation as the only indicator of market loftiness is not good enough. This is not just my viewpoint.

I rest my case your honor.
I have no idea who you are addressing this to. But in case it is at least partly to me, I will say that I agree with you 100%. I have been following PE10 since the publication of Irrational Exuberance in 1996. No one with any sense thinks it is a near or intermediate term indicator. It is not an indicator at all, it is a way to look at known historical data: the cyclically adjusted PE by month. That is all I am looking for; I completely understand that nothing more is reliably possible. People who say that markets cannot be predicted are wrong. They just cannot be predicted over the period that would suit these people's time horizon and patience. Stock market investing is mainly a character test, not a test of intelligence or knowledge. One cannot have it all- all the gains, and none of the losses. If you want all the gains, barring extreme good luck, you will also get a lot of the losses. If an index investor wants to minimize losses, he will miss some gains, and sometimes some very big gains, like the period of our greatest bull market ever, 96-99.

I tend to have legacy investments into which I am more or less locked either because of capital gains taxes that would be due if I sold, or in the case of MLPs ordinary income that would be recaptured. So I tend to always have considerable equity holdings. But if I only could buy index funds in tax favored accounts, I would own very little of any of it now. If we got a roaring bull market, I really would not care. I tend not to have that woulda coulda shoulda problem. Todays PE10 is the 87th percentile ( though we both know that it is distorted by the last two decades, and in particular by today's astounding profit margins). These margins cannot continue to exist in a capitalist economy, though it is possible that today's managed crony economy should no longer be called capitalist.

So I make the assumption that it is likely that very long term means and tendencies will continue to exert themselves. From my POV, going long at the 87th percentile is pure speculation, not investing.

Good luck to anyone who is doing it.

Ha
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Old 10-06-2013, 10:00 PM   #27
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Ha, I appreciate a man who speaks his mind. You don't mince around.

I've heard the mention that profit margins are up there on a historical basis. I have not seen a convincing display of data. It would be nice to see historic data and maybe enough to show periods of reversion to the mean (plus the stock price responses of such periods).

One has to invest in something: stocks, bonds, cash. None of them look wildly attractive but my feeling is that the order right now is stocks >bonds >cash.

Speculation is a dangerous word and can be a contentious issue. I guess we both agree we are not speculators, just some of those other guys are dirty speculators.
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Old 10-10-2013, 03:13 PM   #28
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All of us are speculators, even though some do not recognize or admit to it. It's just a matter of degree!

To speculate is to act without complete knowledge, or to engage in a course of reasoning based on inconclusive evidence. Is there anything in life that is a sure thing?

When we went to school in hope of getting a better education leading to a good paying career, is there any guarantee that we would be able to finish the degree, then being able to get a job as the market demand might have already shifted, and then not getting fired later? There are no certainties, only probabilities which we need to evaluate for ourselves.

For the risk averse, the only thing for sure then is to get a hamburger flipping job, as those are such a low bar to hurdle and most certain to be available. Just settle down with that job, and you will be stress-free, and will always know what tomorrow will bring.

Of course there are people who do reckless gambling, whether at Las Vegas or at the stock market, but I am saying that even those who preach "stay the course" are speculating. Has it been proven a universal and permanent proof that the US economy will forever be as it has been in the last 150 years, a sure thing like the sun will always rise in the East?

Just a decade ago, people would not believe that China would surpass Japan as the 2nd economy. Going back to the 60s, would anybody think Japan would surpass European countries?

How can anybody be so sure of anything? So, no matter how one acts, he is still speculating, but the prudent one would hedge, not go "all the way", and constantly re-evaluate the situation lest his earlier judgement proves faulty. I am not a trader nor ever really try to be one, but have read that successful big-time speculators like Soros are not afraid to admit that they are wrong, and can turn 180 degrees when new developments take place.
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Old 10-10-2013, 06:35 PM   #29
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Sometimes "speculator" is used to define a moral versus immoral way of dealing with money. When it comes to stocks and bonds I tend to think of it as a lot of capital allocation activity. I think some people (not all by any means) who do buy-hold tend to think of market timing as a little immoral. Often people have not really thought the whole picture through and just have a feeling about this.

I suppose even I tend to look at things like day trading as somewhat off-color. I usually want to know about the logic behind the activity but there is very often no systemic ideas behind it or if there is the ideas are a trade secret. And I can accept the trade secret issue.

I don't do much trading, just a minimum amout but to me even day trading and high frequency (HF) trading activity could be good for the markets as a whole. Vanguard has even come out in favor of HF trading as adding liquidity to the markets.

P.S. This is not a refutation of the previous posts mentioning speculation, just some more thoughts on the subject.
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Old 10-10-2013, 06:37 PM   #30
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All of us are speculators, even though some do not recognize or admit to it. It's just a matter of degree!
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Old 10-10-2013, 10:10 PM   #31
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Sometimes "speculator" is used to define a moral versus immoral way of dealing with money.
As I think I introduced the term into this thread, let me say that it has no moral or ethical connotation or color for me. It merely means that the investor is highly likely to get paid off from interest and dividends from his investing, while the speculator has to look for his takeout from someone else who buys his shares. Thus, strictly speaking a non dividend paying stock could not be an investment, it is necessarily a speculation. Although in certain circumstances it may be a very good speculation. Speculations can be very conservative while so-called investments can be very risky. (For example some utility which is borrowing the money to pay its dividends.This definition is very similar to Ben Grahams from 80 years ago.

J.M. Keynes called himself a speculator, in stocks and currencies and in commodities. It is essentially a technical term.

I would also like to agree with you that many people find moral meaning in the strangest places.

Ha
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